NEW YORK, United States — Some years ago, a professor at Harvard Business School shifted his research focus to textiles after a long career in the automobile, steel and food industries. I asked: "Why the new interest in a low-tech industry like apparel?" He replied: “It’s a basic product, but the most globalised, complex and inefficient. If you crack that supply chain, you influence every other industry.”
The Rana Plaza tragedy in Bangladesh was expected to become a turning point for the garment industry, just as the Exxon Valdez oil spill and the Triangle Shirtwaist Company factory fire catalysed necessary action. But two years on, sweeping change has not happened. The apparel industry has not galvanised itself beyond inspections to address critical failures in labour, government and management. The industry has lamented the episode and recognised the human tragedy, while the country’s production orders and export volumes have actually increased. Rana Plaza represents the high cost of lowest-cost business strategies.
The behaviour of this industry — and its consumers — matters perhaps more than any other. Apparel and footwear is a $1.2 trillion industry. It is a dynamic part of global retail, an industry that employs, according to McKinsey, 5 to 12 percent of all workers in the world — even more when wholesale is included. And yet, as McKinsey reports, “Globally, productivity in this sector is 30 percent lower than average productivity across all sectors. Retailing is also an industry with large, sustained productivity differences between developed and emerging economies, as well as among countries at similar income levels.”
In order to fund the cost of improving working conditions and wages, the apparel industry needs to share emerging productivity gains across the whole industry, narrowing the gap between the least and most productive performers by employing promising new technologies and processes. According to McKinsey, doing this has “the promise of boosting worldwide retail productivity by more than half.”
Here, some lessons may be drawn from the fast fashion business Zara. Inditex, Zara’s parent company, manufactures its products using a flexible network of tightly managed contractors. This supply flexibility helps the company to manage the risks of excess inventory, markdowns and stockouts associated with fashion retail.
Warren H. Hausman, professor of management science and engineering at Stanford University, has quantified the financial value of Zara's supply chain flexibility, driven by a reduction in markdowns and stockouts, by comparing the company's market value against that of other specialty stores, athletic brands and department stores. Hausman calls this analysis the “Zara Gap.” According to his research, supply flexibility in retail can increase a business’s profits by as much as 28 percent and increase market capitalisation by as much as 43 percent.
This — not working at the lowest prices and highest volumes possible — is the way to boost productivity in the fashion supply chain. Indeed, lowest-cost sourcing, long lead times and the exploitation of lowest-wage countries are out-dated strategies, mismatched to rising Asian sourcing costs and global consumer demand for trends to be delivered in shorter and shorter merchandising cycles.
But is productivity purely about profit enhancement? To answer the dual challenges of competition and ethics facing the fashion industry, businesses must understand that seizing productivity gains as measured in the “Zara Gap” can be an important step towards improving working conditions and wages, not just greater profitability. This prescription for investment is not rationalised in terms of pure profit extraction, but closer to what Harvard’s Michael E. Porter calls “creating shared value,” the idea that a company can “create economic value by creating social value.”
To safeguard our workers and to benefit supplier communities, the economic formula for investment is: supply flexibility + shared value = social impact. Warren Hausman has identified a technology roadmap for retail supply chains to share productivity across a whole industry. Michael Porter has integrated economic value and social impact.
A supply chain approach that adapts new technologies for speed and flexibility can create productivity — and profitability — from the top to the bottom of the fashion supply chain and mean that consumer value and “values” can co-exist.
John Thorbeck is the chairman of supply chain analytics firm Chainge Capital LLC.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.
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